Setting Up in Business Together

A group of entrepreneurs had developed an exciting new product.  They were setting up in business together as a limited company and wanted a Shareholder Agreement.  They were bursting with enthusiasm, but it soon became clear that things had not been thought through and that there was no real agreement upon the way forward

Their individual understandings of what had already been ‘agreed’ were really quite different.  In particular, there were significant differences in their interpretation of their rights to make decisions concerning the business, the ownership of the intellectual property rights in the product, and the circumstances in which they could each be ejected from the Board.

A Shareholder Agreement is designed to ensure that what seemed like a good idea during the initial excitement of entrepreneurial activity still makes sense in a future reality – be that success or failure – and if there are divisions and misunderstandings at this stage, things will only deteriorate if the business becomes a multi-million pound business in the future!  Accordingly, they understood that it was important to get these things agreed.

Had several advisers been involved, this could have resulted in a long and drawn out negotiation.  It could also have created a lot of bitterness between the parties.  However, by explaining how some of the proposed provisions would work in different situations, Contract Clarity was able to allay some fears.  It was also able to show how some of those provisions could be used to disadvantage another party – and hence why they were unreasonable.  In these latter cases, we were then able to suggest alternative ways forward which provided a fairer outcome.

In this case, the Agreement was signed – but in other cases, clients come to realise that whilst they may have the necessary ingredients for a good business – a great idea, relevant skills and the necessary finance – they don’t have the right recipe for success.  Relationships change over time and even the strongest of them can be tested in the roller-coaster ride which is entrepreneurship, so a lot of heartache (and financial loss) can be avoided if critical weaknesses in a relationship are identified at this early stage – even if that means that the project is abandoned as a result.